| The relationships between market participants are complex, interdependent, and strategic. Therefore, the methodology of strategic network formations is ideally suited to studying market relationships. This approach allows one not only to characterize a stable market structure, but also to explain why this structure arises in the first place. This makes it possible to test government policies and evaluate market risks based on economic incentives. Most research papers consider network models in the form of a simple graph, with nodes representing participants and connections representing dyadic relationships. In real life, the relationships between agents can be more sophisticated. For example, two agents may be involved in one or more contracts with associated prices and quantities. In my thesis, I consider two strategic network formation models with rich network structures and heterogeneous agents. Using the methodology of cooperative game theory, I explain how network positions, prices, and volumes are related for each market participant. I also shed light on the stability and efficiency of the markets in general. The first chapter introduces a financial network model incorporating shadow banks, traditional banks, central bank and money market investors. The model endogenously derives the core-periphery structure of the financial market and money market "bank run." It also characterizes interbank loans and banks' balance sheets and describes liquidity provision process before and during the financial crisis. Policies implications are provided with regard to reducing systemic risk. The second chapter introduces a bargaining model of trades where sellers can reach buyers through other sellers in exchange for side payments. After the process of information sharing, sellers and buyers bargain for the good. I show how a network of intermediaries arises as a result of the sharing network formation rules and find equilibrium prices and quantities in stable networks. The stable networks are evaluated with respect to social welfare. |
